Stampede for exit follows attempt to curb hot money

The Indian government's attempt to curb hot money flows into one of the world's fastest growing economies put shares on a rollercoaster yesterday. The main index plunged 9% before recovering to close 1.8% lower.

Trading in Mumbai's Sensitive index - or Sensex - was suspended for an hour after the markets opened. It had fallen 1,500 points in minutes, prompted by a proposal to limit the issue of participatory notes, which allow foreign funds to buy Indian shares anonymously. Investors had taken the announcement to mean a prohibition on such trades - leading to a stampede out of the market.

Investment through this route is more than 3,500bn rupees (£45bn) - compared with 319bn rupees in March 2004.

The sharp Sensex decline prompted the country's finance minister to reassure markets that authorities were only concerned with limiting the instrument. The Sensex closed at 18,716 points.

Officials have become increasingly worried by the Sensex, which rose 1,000 points in four days raising concerns that "hot capital flows" could harm the broader economy by fuelling inflation and bring more volatility to the financial system.

The Indian market's rise of 23% in the past month - the fastest in Asia - has been driven by foreign investors looking for a safe haven amid uncertainty in the west. The flows have pushed the rupee up 12.5% against the dollar, hurting exporters especially in the hi tech sector. The Indian economy expanded at an annualised rate of 9.3% over the three months to June.

Finance minister Palaniappan Chidambaram said the measures are "in the long-term interest of the investors" but analysts suggested they were not good for controlling capital flows.

Nirmal Jain, of brokerage house India Infoline, said the market had a long way to climb. "You have average earnings multiples which are about 20. When you consider Chinese equities trade at multiples of 60, you can see where India is going."